At RateState.com we’re committed to providing mortgage loan solutions that help consumers be as successful as possible with their finances and home ownership in general. Recently 40-year mortgages have become increasingly popular for obvious reasons: lower monthly payments. There’s even discussion of 50 and 60-year mortgages. Wow!
The question is: Is this a good thing? Does this really provide value to the consumer or just make it more difficult to be financially successful and a home owner?
Here are some excerpts from the Deseret Morning News written by Dave Anderton
“Soaring housing prices are convincing some homebuyers to take on 40-year mortgage loans, which can reduce monthly housing payments but increase the amount of interest paid…estimates that about 15 percent of her loans this month will be 40-year mortgages.
“I would say the public doesn’t know too much about them,” MacKenzie said. “They know more about 30-year and interest-only loans. The lenders are just starting to get it out where they are available.”… Earnest, 34, closed last week on an $855,000 house located in the Provo Riverbottoms. He financed the home using a 40-year option ARM. His monthly payments will be roughly $2,300, not including taxes and insurance.
“My wife is very excited,” Earnest said. “Of all of the loan choices that exist, the one that most perfectly meets our objective — which is to give as little to the bank as possible — is this 40-year option ARM.”
Under a traditional 30-year fixed mortgage at 6.5 percent, Earnest’s monthly payments would have been roughly $5,404….While a 40-year mortgage works for Earnest, he is quick to acknowledge that the product is not an excuse to “go live the high life.”
“We discourage anyone getting into this type of a program if they wouldn’t otherwise qualify for the equivalent 30-year fixed mortgage,” Earnest said. “If somebody doesn’t qualify for this, we’ll get them into the best interest-only scenario until their application is strong enough to get one of these option ARMs.”… “There’s a couple of drawbacks in my opinion,” Alley said. “The interest rates that you are going to pay for that program are typically higher than just your straight 30-year mortgage. So you’re paying a slight premium right now for that 40-year mortgage. I’ve seen it as high as 3/8 to 1/2 percent above a straight 30-year fixed. That takes away some of those benefits of extending the term of the loan.”
However, even at a higher interest rate, the 40-year mortgage lowers a homebuyer’s monthly payment… “Depending on the borrower, the 40-year mortgage might make sense for a first-time homebuyer who is trying to keep their payments down,” Hildebrandt said. “It’s not for every borrower, and like any other mortgage product it has advantages and disadvantages.
“For some borrowers the longer amortization period could make the difference between owning a home versus not owning a home.”
Clearly 40-year mortgages could make a measurable difference to the cash-flow of the average home owner. But is it worth the significant additional interest paid over the life of the loan? The truth is that for the average income earner in the U.S. this may be one of the only viable options for homeownership because of our historical lack discipline in savings and budgeting our incomes. Only time will tell if these longer amortization periods on home loans will stick around.